When you see ads for ‘buy now, pay later mobile phones’, you’re probably looking at a hire purchase. But what exactly is a hire purchase?
Hire purchase enables an individual to make monthly or weekly payments or instalments and ‘Hire’ a good or a service for a limited period of time or term. Once all the instalments are made, the individual then owns the product. The terms and conditions are set as per the hire purchase agreement. Many individuals use it for furniture financing, for financing a car or even electronics and other household appliances.
The agreement generally lasts somewhere between two to five years, with three years as the most common timeframe. As per the agreement, the purchaser does not own the commodity until the last instalment is cleared; however, they have full usage of the purchase throughout the term.
You can have an agreement with several financial bodies such as banks, building societies, retail stores, finance companies, garages etc. Now, the store or the garage doesn’t actually finance the loan, they are hired by financial institutions and earn commission from the institutions for arranging the loan. One should read the hire purchase document carefully before committing to anything!
How does it work?
The hire purchase or EMI scheme as it is known in some countries is drawn up and signed by the consumer and the lending party. If a retailer is involved in the transaction, then they also sign the agreement and supply the purchased item.
The financial structure of the agreement (Fees & Costs)
The fees and costs may differ from one agreement to the next, but here is what it may include.
- Fees for documentation
- Interest hike on lapsed payments, what this refers to is the additional amount of interest that is charged on the uncleared amount.
- Penalties for lapsed or delayed payments
- Completion fees for the ownership rights to be passed on to the purchaser
- Repossession charges
- Rescheduling charges
- Any balloon payment charged on the hire purchase loan, while this is not a separate additional charge, it has the effect of delaying parts of the cost until the end of the loan. Which means at the start of the term purchasers are paying reduced interest for their loan than they would for a bank or a credit union loan.
Can a purchaser terminate a hire purchase agreement?
A purchaser can definitely end the agreement by providing prior written notice to the financial body/ the store etc. However one should be aware of the fact that this will attract penalties to be paid for defaulting the contract. In this scenario, one can either:
Return the goods and pay 50% of the total amount, in the case where you haven’t already paid the half due – This is known as the half –rule. You are not required to make this payment immediately. In case of any damages to the product, the consumer is liable to pay for the damaged caused. The financial entity can draw up costs, however, the consumers can get their own estimates as well.
One can clear the sum in advance, the consumer has the option to pay the difference between the payments made so far and the final amount. For doing so there is a reduction on the total amount to be paid for the loan than initially quoted. This reduction is in line with the ones quoted for earlier payments of other bank loans such as home loan, personal loan etc. However, no reduction amounts to a large sum.
You can find further info here.
Can the lender repossess the items?
The financing party can only repossess the items under specific circumstances, such as if the purchaser hasn’t yet paid 1/3 of the total amount of the agreement, here the lender can repossess the goods without any legal action against the buyer.
However, if the purchaser has paid 1/3 of the amount or more than that the lender cannot repossess the goods without any legal proceedings. If this 1/3 rule is breached by the lender the consumer is entitled to get a refund of all the payments made and can terminate the agreement. To know more, head here.
What happens in case of damages or faulty goods?
First things first, anything you buy under the hire purchase scheme must meet the requirements laid down by the Consumer Guarantees Act. In general, the goods must:
- Must meet merchantable quality
- Must be fit for use and should be reasonably durable
- Must meet the description as showcased either as a part of the advertisement, the packaging or as described by the salesperson.
If the goods purchased under hire purchase agreement are or become faulty after use, both the parties – the retailer and the finance company are held responsible. A consumer can make a claim against either. A claim cannot, however, be placed upon the manufacturer of the goods.
If a consumer returns a faulty product they can receive a refund of all the instalments paid as per the consumer rights applicable in this given scenario, the rules are the same as it would be for any regular fully paid purchases. A guarantee in a hire purchase scheme is deemed equivalent to that given on outright purchases. The guarantee is given by the manufacturer. In case of a faulty product, a purchaser is entitled to either get it repaired under the guarantee provided or ask for a complete refund or exchange of the product.
It works the other way around as well, under the scheme a purchaser is expected to take good care of the product. If a damaged product is returned to the retailer or the lender, both the parties are entitled to send the repair bills to the consumer as well.
Now you may have come across some ads that say ‘Rent to Own purchases’. That’s a whole different scheme. It is also known as the personal contract purchase. What it simply is that you rent a commodity from a lender for a set term and the payment or the instalment size goes down as the term advances. There is no liability on the part of the consumer to own the product at the end of the term unlike in hire purchase.
We know that this is a lot of information to take in, especially for those of you looking for bigger purchases like rent to own appliances. But remember to just take your time and always read the agreement fully, and you’ll be more likely to sign something that you’re not only comfortable with but that you understand, and is fair.